What sent stocks down on the eve of earnings season?

Two factors drove the over 5% drop of the three major U.S. equity indices. One, fears over rising interest rates, and Two, a big selloff of tech shares.1,2

Closing market bid yields for the 10-year and 2-year note were barely changed from Tuesday at 3.22% and 2.88%, but those yields were respectively at levels unseen since 2011 and 2008. The perception that money is becoming more expensive to borrow affects the outlook for the housing market, business development, and consumer spending and confidence. Institutional and individual investors are wondering if the Federal Reserve will have to raise interest rates faster to cool off an economy at risk of overheating.1,2,3

The S&P 500’s tech sector slumped 4.8% Wednesday, with some of the biggest names losing even more than that. The sector suffered its worst trading session in seven years, and since some of those names carry a lot of weight in the Nasdaq Composite and Dow Jones Industrial Average, those losses were deeply felt there. With just a third of October over, the Nasdaq is down 7.5%, month-to-date. Overseas stocks also retreated, as European investors were concerned about Italy’s ballooning budget.3

Will earnings season change the mood on Wall Street? On one hand, analysts project Q3 earnings for the S&P 500 to be almost 20% better than a year ago. On the other hand, investors may focus on the outlook instead of the results. If corporations widely cut back their profit expectations for Q4 and Q1, which may breed significant pessimism, the weeks ahead could pose a challenge to the bull market.4

Do you have questions about these developments and about where the markets may be headed? Please feel free to call or email me today.